Facebook's Future Rests on Knowing You Even Better

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Facebook's Future Rests on Knowing You Even Better

Dmitrii_Guzhanin / iStock

For the past few years, Facebook’s quarterly earnings calls have been something of a victory lap. Even at its massive scale—$40 billion in annual revenue and more than half of the world’s internet users, the company manages to grow consistently each quarter, even beating analyst expectations. Wall Street has rewarded the company with a stock price that can only go up, increasing 560 percent in five years and placing Facebook among the most valuable companies in the country.

But growing outrage over the social network’s role in Russian election interference, filter bubbles, and the spread of divisive disinformation has led the company to announce sweeping changes in the kinds of content it will show users. Facebook executives have acknowledged the changes may affect how much time people spend on their products, which would mean fewer opportunities to show them ads. Ad impressions, or the number of ads shown to people, only grew by 4 percent in the fourth quarter, and Facebook has warned not to expect much growth in “ad load,” or the number of ads it can show each person.

Less time spent on Facebook could deal a huge blow to Facebook’s once-ironclad business. But the company has a plan to counteract that: It is raising its prices. A lot.

Even as Facebook reported that users collectively spent 50 million fewer hours a day on the network in the fourth quarter, revenue during that period increased 47 percent to $13 billion. Facebook pulled this off by boosting the average price per ad by 43 percent, CFO David Wehner said on the company’s analyst call Thursday.

How does Facebook get away with jacking up its prices so dramatically? For one, it operates in an unregulated duopoly alongside Google. Together they control more than 60% of the digital-advertising market. But second, Facebook’s ability to target its users with highly tailored (and, in theory, highly effective) ads means marketers are willing to pay more.

On the analyst call, Wehner touted the company’s progress in delivering better targeting, better types of ads, and “driving better conversion,” as the reasons advertisers are willing to spend more on the platform. If Facebook can keep improving its targeting, it “will translate into higher effective prices for our business,” he said. COO Sheryl Sandberg frequently names targeting as the company’s big opportunity. “I think if you think about where the growth remains, it really is in increasing the relevance of the ads,” she told analysts in November.

That’s a lot of pressure for Facebook’s ads to be effective. Fortunately for investors, the company is well-positioned to do that. It has been collecting terabytes of data on all of our likes, friends, habits, and messages for over a decade. Facebook is so ingrained in our lives that it has the ability to manipulate our moods. Apply that data to advertising, and the company is so good at targeting us that it is subject to a persistent conspiracy theory that the Facebook app is somehow secretly listening to our conversations. Many people are staunchly convinced of it, no matter how many times the company denies it or how many news outlets (including WIRED) debunk it.

Unfortunately for users, mining our personal data to better sell us stuff is the future of Facebook’s business. Over the years, Facebook has managed to rise above criticism over privacy and transparency by pointing to settings that purport to give users control over what they share and with whom. But those settings are complex and not well understood by users. Further, Facebook does not give users full control over their data.

That’s changing in Europe, where the EU recently mandated that its citizens be given “data portability” and “data erasure”—the ability to export and delete personal data created on tech services. Sandberg noted that the rule may result in some people opting out of Facebook’s targeting tools, but the company isn’t forecasting a big impact from it. “We're going to continue to give people a personalized experience and be clear how we're using data and give choices,” she said.

One choice people have is to use Facebook less, as they did last quarter. The company has warned that time spent on Facebook may continue to decline. Facebook can continue its dominance, despite the decline, as long as it can use its trove of personal data to target increasingly expensive ads. For now, the world has maxed out on using Facebook—the question is whether advertisers will do the same.